New Zealand central bank shifts to neutral tone and warns of growth risks

New Zealand’s central bank struck a neutral tone as it marked two full years of steady policy on Thursday, saying its next move would depend on how the economy fared and cautioned of downside risks to growth from global trade frictions. As widely expected, the Reserve Bank of New Zealand kept the official cash rate (OCR) at 1.75 percent, where it has remained since late 2016, and reiterated it expected to hold rates into 2020. The central bank removed a line from its previous statements that its

New Zealand’s central bank struck a neutral tone as it marked two full years of steady policy on Thursday, saying its next move would depend on how the economy fared and cautioned of downside risks to growth from global trade frictions.

The New Zealand dollar rallied briefly and bonds sold off as the markets priced out any chance of a near term rate cut and instead focused on when New Zealand would join some of its global counterparts in raising rates.

As widely expected, the Reserve Bank of New Zealand kept the official cash rate (OCR) at 1.75 percent, where it has remained since late 2016, and reiterated it expected to hold rates into 2020.

“The timing and direction of any future OCR move remains data dependent,” Governor Adrian Orr said in a statement, and in a press conference later in the day he refused to rule out a rate cut if economic conditions deteriorated.

The central bank removed a line from its previous statements that its next rate move could be either up or down, but noted both upside and downside risks remained to growth and inflation projections.

“We don’t agree that the RBNZ needs to maintain the fence-sitting dual approach to policy,” said Citibank economist Paul Brennan.

“While our own forecasts show a near-term moderation in GDP growth, we expect CPI inflation to exceed the RBNZ’s latest forecasts and maintain the view that the OCR will need to rise from Q3 next year.”

A run of stellar economic data including a surprise drop in third-quarter jobless rate to 10-year lows, better-than-expected growth and inflation numbers over recent months, has given the RBNZ some breathing room.

However, Orr pointed to temporary factors for the pick-up in second-quarter economic growth and cautioned of headwinds to growth.

“Weak business sentiment could weigh on growth for longer. Trade tensions remain in some major economies, raising the risk that trade barriers increase and undermine global growth.”

The New Zealand dollar hit a fresh three-month high of $0.6820 immediately after the rate decision but quickly retreated from those levels to last hover around $0.6785.

Government bonds were sold off for a second straight day as investors priced out the risk of a cut with yields on the long-end of the curve up about 5 basis points.